This task involves using Financial Risk Analysis skills. Information:

You have been asked to provide analysis for and advice to an Australian-based, high net worth client, who is considering the purchase of a fixed-term investment portfolio (FIP) issued by an Australian Bank. Your client wishes to be advised on the financial risks to which they would be exposed in association with the purchase.

You have the following information on this investment, as well as other information on key financial variables:

• You should assume the end of June 2024 as 'now/today' for the purpose of undertaking your calculations
• The FIP consists of three portions: Security A, B, and C. The maturity is one year for all securities
• The payoff for security A is AUD10,000 + R_ASX200T x AUD10,000
• R_ASX200T represents the rate ofreturn of the ASX 200Indexfrom now until the maturity of the FIP
• The payoff for Security B is HKD60,000
• The payoff of security C is AUD20,000 - (GOLD_T/GOLD₀) x AUD10,000
• GOLD_Trepresents thevalue of gold in AUDat maturity of the FIP andGOLD₀ thevalue of gold in AUDat inception of the FIP (i.e., the end of June 2024)
• Your client is funding this purchase partially with a U.S. based debt facility. At the end of one year, your client needs to pay USD5,000
• You have been provided with time series data in the form of gold prices in AUD, the relevant exchange rates, and the value of the ASX 200 Index (see the spreadsheet provided with the ( Management Case Data below ...

Date	GOLD	USDAUD	HKDAUD	ASX200			Notes:
30-Jun-14	13.436	0.9379	0.1368	5395.747			HKDAUD	AUD amount for 1 HKD
31-Jul-14	13.345	0.9363	0.1388	5632.914			USDAUD	USD amount for 1 AUD
31-Aug-14	13.22	0.9328	0.1381	5625.895			ASX200	The index value of the top 200 Australian Company
30-Sep-14	13.338	0.8707	0.1473	5292.812			GOLD	Gold Price in AUD
31-Oct-14	13.015	0.8774	0.1467	5526.602
30-Nov-14	13.372	0.8498	0.1514	5313
31-Dec-14	14.028	0.8123	0.1576	5411.018
31-Jan-15	15.5	0.7762	0.166	5588.321
28-Feb-15	14.83	0.7804	0.1647	5928.767
31-Mar-15	14.826	0.7581	0.1689	5891.505
30-Apr-15	14.42	0.7896	0.1635	5789.983
31-May-15	14.826	0.7649	0.1686	5777.16
30-Jun-15	14.665	0.7685	0.1677	5459.01
31-Jul-15	14.171	0.7276	0.1757	5699.164
31-Aug-15	15.132	0.7118	0.1819	5206.976
30-Sep-15	15.35	0.6988	0.1837	5021.629
31-Oct-15	15.5	0.7117	0.181	5239.439
30-Nov-15	14.026	0.7228	0.1781	5166.518
31-Dec-15	13.878	0.7266	0.1772	5295.859
31-Jan-16	15.295	0.7053	0.1812	5005.524
29-Feb-16	16.449	0.7132	0.18	4880.926
31-Mar-16	15.31	0.765	0.1677	5082.785
30-Apr-16	15.5	0.7587	0.1691	5252.217
31-May-16	15.946	0.7213	0.1776	5378.56
30-Jun-16	16.9	0.7424	0.1734	5233.375
31-Jul-16	16.894	0.7591	0.1696	5562.358
31-Aug-16	16.646	0.751	0.1716	5433.033
30-Sep-16	16.649	0.7649	0.1685	5435.921
31-Oct-16	15.956	0.7592	0.1696	5317.732
30-Nov-16	15.13	0.7386	0.1744	5440.472
31-Dec-16	15.228	0.7202	0.1781	5665.791
31-Jan-17	15.073	0.7578	0.1698	5620.911
28-Feb-17	15.528	0.7666	0.1676	5712.221
31-Mar-17	15.45	0.7636	0.1687	5864.905
30-Apr-17	16.118	0.748	0.172	5924.064
31-May-17	16.1	0.7432	0.1724	5724.572
30-Jun-17	15.366	0.7681	0.167	5721.494
31-Jul-17	15.07	0.7997	0.1603	5720.591
31-Aug-17	15.66	0.7948	0.1611	5714.522
30-Sep-17	15.539	0.8	0.1632	5681.61
31-Oct-17	15.75	0.8049	0.1673	5909.017
30-Nov-17	16.036	0.8049	0.1686	5969.892
31-Dec-17	15.736	0.8049	0.1635	6065.129
31-Jan-18	15.7	0.8049	0.1577	6037.683
28-Feb-18	15.957	0.7778	0.164	6015.959
31-Mar-18	16.37	0.7675	0.1657	5759.365
30-Apr-18	16.5	0.753	0.1688	5982.732
31-May-18	16.281	0.7567	0.1684	6011.883
30-Jun-18	16.005	0.7397	0.1725	6194.633
31-Jul-18	15.537	0.7438	0.1714	6280.201
31-Aug-18	15.685	0.718	0.1762	6319.498
30-Sep-18	15.482	0.7224	0.1767	6207.561
31-Oct-18	16.198	0.7075	0.1799	5830.307
30-Nov-18	15.795	0.7305	0.175	5667.157
31-Dec-18	17.05	0.7045	0.1814	5646.369
31-Jan-19	17.117	0.7267	0.1748	5864.654
28-Feb-19	17.394	0.7095	0.1791	6168.992
31-Mar-19	17.122	0.7109	0.1793	6180.731
30-Apr-19	17.174	0.7052	0.1811	6325.466
31-May-19	17.585	0.6943	0.1841	6396.852
30-Jun-19	19	0.7023	0.1824	6618.772
31-Jul-19	19.599	0.6844	0.1853	6812.56
31-Aug-19	21.432	0.6731	0.1894	6604.215
30-Sep-19	20.826	0.6755	0.1891	6688.348
31-Oct-19	20.32	0.6891	0.1852	6663.374
30-Nov-19	20.242	0.6767	0.1888	6845.996
31-Dec-19	20.407	0.7027	0.1826	6684.075
31-Jan-20	21.955	0.67	0.1925	7017.222
29-Feb-20	23.662	0.6524	0.1993	6441.21
31-Mar-20	24.572	0.6142	0.2108	5076.827
30-Apr-20	24.58	0.6523	0.1971	5522.353
31-May-20	24.221	0.666	0.1944	5755.69
30-Jun-20	24.23	0.6898	0.1874	5897.882
31-Jul-20	25.67	0.7147	0.18	5927.781
31-Aug-20	25.098	0.7389	0.1744	6060.462
30-Sep-20	24.872	0.7162	0.1801	5815.941
31-Oct-20	24.899	0.7029	0.1836	5927.58
30-Nov-20	22.408	0.7355	0.1751	6517.807
31-Dec-20	23	0.7696	0.1671	6587.096
31-Jan-21	22.526	0.7641	0.1681	6607.357
28-Feb-21	21.081	0.7711	0.1665	6673.268
31-Mar-21	20.654	0.76	0.1689	6790.666
30-Apr-21	21.255	0.7705	0.1667	7025.817
31-May-21	23.053	0.7738	0.1664	7161.627
30-Jun-21	21.873	0.7496	0.1715	7313.023
31-Jul-21	23.099	0.7335	0.175	7392.624
31-Aug-21	23.123	0.7321	0.176	7534.9
30-Sep-21	22.394	0.7232	0.1779	7332.159
31-Oct-21	22.154	0.7526	0.1712	7323.737
30-Nov-21	23.39	0.712	0.1808	7255.97
31-Dec-21	23.37	0.7277	0.1765	7444.642
31-Jan-22	23.753	0.7074	0.1819	6971.632
28-Feb-22	24.794	0.7264	0.1764	7049.125
31-Mar-22	23.924	0.7489	0.1701	7499.588
30-Apr-22	24.817	0.7084	0.1792	7435.013
31-May-22	24.01	0.7177	0.1777	7211.172
30-Jun-22	24.5	0.6907	0.1853	6568.064
31-Jul-22	23.39	0.6997	0.1826	6945.15
31-Aug-22	23.23	0.6847	0.1858	6986.757
30-Sep-22	23.84	0.6409	0.1981	6474.198
31-Oct-22	23.8	0.6395	0.1992	6863.459
30-Nov-22	24.31	0.6794	0.1913	7284.173
31-Dec-22	24.89	0.6814	0.1889	7038.689
31-Jan-23	25.31	0.7056	0.1811	7476.661
28-Feb-23	25.02	0.6737	0.1889	7258.399
31-Mar-23	27.33	0.6686	0.1902	7177.755
30-Apr-23	27.8	0.6619	0.1928	7309.152
31-May-23	28.03	0.6498	0.1974	7091.311
30-Jun-23	26.62	0.6667	0.1917	7203.299
31-Jul-23	27.07	0.6721	0.1903	7410.424
31-Aug-23	27.76	0.6478	0.1969	7305.269
30-Sep-23	26.73	0.6442	0.1978	7048.637
31-Oct-23	29.05	0.6345	0.2019	6780.678
30-Nov-23	28.44	0.6612	0.1931	7087.334
31-Dec-23	27.96	0.6818	0.1877	7590.818
31-Jan-24	28.6	0.6599	0.1935	7680.718
29-Feb-24	28.81	0.6497	0.1962	7698.699
31-Mar-24	31.02	0.6522	0.1959	7896.858
30-Apr-24	32.86	0.6485	0.1968	7664.075
31-May-24	32.56	0.6646	0.1922	7701.739
30-Jun-24	32.39	0.6672	0.1918	7767.47
Source iress.com Sep 2024

The Task

Create a detailed report in which you address the following:

1. Identify the financial risks to which your client would have exposure if invested in this FIP. You should tabulate the different financial risks to which an investor would be exposed if they bought the FIP and the sources of each financial risk.

(10 marks)

1. Your client is especially concerned about extreme adverse movements associated with the payoff of this investment portfolio. Provide your estimates associated with the payoff at maturity of the FIP given the underlying risk factor(s).

(Hint 1: the potential loss(es) can be calculated in relation to the amount you would receive if the FIP could be cashed out now (ignore time value). You should consider both likely payoffs and the probabilities of these payoffs. The loss(es) should be based on the risk characteristics of the underlying risk factor(s). You should not limit your estimates to only one loss scenario. Loss scenarios can be based on one risk factor or a combination of risk factors.)

(Hint 2: you should consider measures such as value-at-risk (VaR) to assist you in determining the loss(es). Any attempts to further assess the extreme risk will be rewarded.)

(Hint 3: it is not optimal to give all metrics equal weight in your discussion and interpretation. You should form an understanding of which ones are more important /counter intuitive/unexpected than others. Keep in mind that the ultimate goal is to assess the riskiness of this product. Any discussion should serve the goal.)

(50 marks)

1. Your client is concerned about the default risk of the issuer. How would you assess the credit risk of this FIP?

(Hint 1: You should tailor your credit assessment process to the issuer: the Australian Bank. You can use an existing Australian Bank as an example to orient your discussion.)

(Hint 2: You should discuss in detail, without calculations, the credit risk assessment process. Describe what method(s) might be employed, using which dataset(s) and, if available, how you would go about collecting this data.)

(20 marks)

1. Use ChatGPT to generate an output on the model risks associated with your methods. Critically evaluate the output.

(Hint 1: Discuss only one or two limitations/model risks associated with your methods. So pointed prompting and/or truncation of ChatGPT output is recommended before critiquing the output.)

(20 marks)